We develop a method of managing strategic reserves, in this case, the U.S. Strategic Cobalt Reserve. A rationale for the stockpiling of cobalt is presented, followed by a method for bringing the stockpiled amount from any level to a desired goal, in this case an amount determined by the Federal Emergency Management Agency to last through three years of conventional warfare. The method involves solving a stochastic programming problem in order to balance the expected values of the social benefit and the social cost of building the stockpile-Social benefit is accrued by decreasing the impact and the probability of a war or a major supply disruption occuring before the stockpile goal is realized; social cost is determined from the additional amount U.S. cobalt consumers must pay due to the increase in world demand brought about by stockpiling. The management of the filled stockpile is then discussed, introducing the idea of using the stockpile to assure stability in the world price of cobalt and of defraying maintenance costs by market speculation. Least-squares fitting is used to determine whether prices are high or low and how much to sell or buy, respectively, to bring prices back into line. Then the conditions under which the stockpile should be drawn down are considered, with the proper rate and total amount of released stockpile material determined for two cases, that of a major supply disruption and that of actual warfare. Finally, generalization of the method to cover other strategic stockpiles is discussed. © 1985.
Cole, David; Haarsma, Loren; Snoeyink, Jack; and Klaasen, Gene A., "The problem of managing a strategic reserve" (1985). University Faculty Publications. 467.